Monday, August 01, 2011

The land of a thousand niches

I just came across a great blog which I hadn't been aware of yet: "VC Matters" (100 points if you get the pun), written by Rory O'Driscoll of Scale Venture Partners. Rory has an incredibly successful track record of SaaS investments, having invested in home-runs like Omniture, ScanSafe, Box.net, DocuSign, ExactTarget and many others. After reading through his posts I immediately added his blog to my RSS reader and to the "must-read list" of recommended resources that I maintain for the founders of the SaaS startups that I have invested in. I'd say Rory is one of the Top 3 VC bloggers about SaaS, the other two being David Skok of Matrix Partners and Philippe Botteri, who recently moved from Bessemer to Accel.

"A phrase that stuck in my mind from a 1994 software report, was the description of the business software market as a 'land of a thousand niches'. [...]

Business software, unlike either the consumer internet business, or the technology infrastructure business, is not a monolithic market, but instead is a series of separate vertical and horizontal opportunities. [...]

As a result there will be many medium sized, ie $1.0 Bn plus, SaaS technology companies built over the next five years to satisfy these various needs."

As an investor in Propertybase (CRM for the real estate industry), Clio (practice management for lawyers), samedi (practice management for doctors), FreeAgent Central (accounting for freelancers) and other SaaS startups targeting vertical niches, I wholeheartedly agree. Each of these companies operates in a niche, but these niches are so large that each of these companies has the potential to become worth several hundred million dollars.

Rory continues:

"A great example to me of a vertical is that has massively exceeded what I would have guessed as its potential is Real Pages. The company focuses on automating the process of managing residential apartment buildings. My gut would have been “niche vertical, not that interesting”. Turns out I was wrong. Real Pages has a$1.8Bn market capitalization and $200 MM in trailing revenue! I believe this is indicative of what will be a multi-year wave of SaaS based application software companies in specific verticals or functional areas, generating $1Bn valuations."

That reminds me of StyleSeat, a startup that provides business tools and lead generation for the wellness & beauty industry and which Point Nine Capital has invested in. Correct me if I'm wrong, Pawel, but I think neither of us has a particular affinity with the wellness & beauty industry (I usually let my hair grow until my wife (thankfully) makes it clear to me that my look is absolutely unacceptable, and Pawel doesn't have a particularly maintenance-intensive hairstyle either). So initially we were a little skeptical about the market – until we learned that wellness & beauty is a $40B industry in the US, with about 250,000 beauty salons and employing about 850,000 people. Gotta love "niches" like this!